Icelandic bank Icesave’s been the subject of a few newspaper money section articles about limited withdrawals from its UK account with concerns about the credit crunch. Newspapers do enjoy stories of worry, doom and gloom, so my aim’s to take a detailed look at the bank; how your money is protected in it, and the safety issues to help you make up your own mind.

It’s a difficult call, and my aim is far more to give you the information needed to make a rational consumer decision rather than sway you. My view is in the summary at the end, but its your money, you need to make your own mind up!

Why this focus on Icesave?

My overall reason is because its cash ISA is currently one of my top picks (see top cash ISAs) and its savings account is still one of the highest interest payers (see top savings). Therefore it’s an account that many, choosing on standard MoneySaving terms, should be picking/using.

Yet with the credit crunch biting; it’s important to also consider wider issues. Before I go into those, it’d be useful if you’d read my full Are your savings safe? guide first….

Now onto a couple of stats.

Icesave is a member of the financial services compensation scheme (FSCS).

All money in UK savings accounts, cash ISAs and current accounts are protected up to the first £35,000 put in there, in the unlikely event it went bust. Icesave is no different in that respect.

Icesave has opted for the ‘passport exemption’.

However, Icesave is one of a few EEA (European Econmic Area) banks, which has the passport exemption (there’s a full list in the Safe Savings guide). This means that in the unlikely event it went bust, the first E20,000 needs to be reclaimed from the Icelandic compensation system not the UK system. The remainder of the £35,000 would still come from the UK scheme.

Add this exemption together with the fact the Icelandic financial system is exposed to the crunch and this has caused a small minority of people to wobble.

It’s interesting to note that this doesn’t seem to be happening, to the same extent with Kaupthing, the current highest interest savings account. While it too is a bank of Icelandic origin, when UK savers put their money in, they’re in fact doing it with its UK banking arm, which has the standard FSCS protection as it hasn’t chosen the exemption.

In the unlikely event of problems; how would the passport protection work?

This is something we’ve raised with Icesave; below is its response, which was backed up by a document from the Icelandic Financial Services Association; confirming the legal strength of the info.

“Icelandic banks pay into a fund which is set aside to be paid out for compensation should it be needed – the UK scheme doesn’t have this and could therefore technically take longer than the Icelandic scheme!” (Note from Martin: The UK scheme is set up to call money in if needed, rather than work on a pot of money system).

All talk of compensation schemes is purely hypothetical because they have never been used, but given the above, there is no reason to assume that the Icelandic scheme would be any more complicated or take longer.

In the extremely unlikely event that the Icelandic government wasn’t in a position to meet all claims, all the Nordic countries have an arrangement where they will step in and help any one of the participating countries that are in trouble so there is an additional layer of reassurance and cover.

If you could make it clear that Icesave customers are fully protected up to £35k the same as customers of any UK bank and that they will be paid as quickly I’d be very grateful!”

Of course this doesn’t offset the fact you’d be dealing with an overseas regulator, yet as this is an unlikely possibility, the above does put to rest many of the issues.

So what’s the problem?

So far I’ve deliberately focused on “how protected is it?” rather than “how likely is it to go bust?” And as far as I’m concerned that’s the more important question.

The reason behind this is simple. The credit crunch is a nightmare. Picking out “which bank is under threat” almost feels like a game of random chance. The job of looking at the indicators isn’t mine, that belongs to the City banking and bond strength analysts. Yet even then the crunch has shown, that system isn’t very accurate and hasn’t been predicting events.

Northern Rock was an issue of sentiment. When it got into problems, the cause was the fact that a huge amount of its cash came from the money markets, which were teetering. However, what killed it was the mass panic and withdrawal queues.

Giant US bank Bear Stearns was much more of a shock for many, and was highly rated as a profitable player not long before hand.

That means picking out if any other banks are vulnerable is a bit like drawing a lottery ticket. And it’s virtually impossible to pick out which banks have risks (my guess is even in the discussion linked from this blog you’ll see people arguing both sides). As that’s all about speculation, for me it is far more important to understand the available protection; which is fact.

On its own website Icesave has an article detailing its own financial strength indicators. This boast should of course be taken with as much a pinch of salt as anyone saying the system is struggling.

The Summary

Icesave has high interest rate accounts, and is a best buy in certain categories. That makes it an attractive account. The risk of it going bust, doesn’t seem to be very substantively more than any other top savings account bank and this is unlikely to happen (though nothing’s impossible).

Yet if you are looking to place more than £35,000 in it, so that your cash is not covered by the compensation scheme, the risk element with it (and any other bank) increase. You need to see how that fits in with your entire holding of savings (see are your savings safe? for strategies).

If, in the unlikely event Icesave were to collapse, it would probably be bureaucratically more difficult to get your money back than if a fully-UK bank went bust; but again not substantively so, and may actually be faster.

Therefore, where Icesave is a best buy, it remains a best buy. If I were to arbitrarily pick accounts not to include, then articles wouldn’t be accurate, where do you draw the line? This site is about listing highest interest rates to save people money… to get in the ‘picking the dodgy bank’ game – is an impossible task.

Of course, there are no guarantees, and it is a VERY tough call, but this is my best estimate of the situation. Yet, my aim by writing this breakdown of the facts is to help you make your own decision with full information.

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